If we follow the weather person – March is in like a lion with all the turmoil in the banking markets. We can only hope it will be out like a lamb. We are not customers of Silicon Valley Bank or First Republic though we have done business with Signature – three very different stories with sadly similar outcomes: Disruption in the financial markets, women and men faced with the challenges in finding new bank relationships and surely many others out of jobs.
Maybe we should take a minute and look at what a modern bank really is: It is itself a leverage machine. Let’s take the largest bank in America – JPMorgan Chase who, on 12/31/22, had $3.202 Trillion dollars in assets and $303.62 Billion in Equity. Now while there are lots and lots of measurements of a bank – a simple leverage ratio would be 10.5 or $10.50 dollars in assets for every $1 in equity. To compare, let’s look at you and me – what the Federal Reserve calls “Balance Sheet of Households”. At the end of Q3 2022 we had $161.455 Trillion in assets – you know, our homes, cars, microwave ovens, etc. and $144.006 Trillion in equity resulting in you and me with that same simple leverage ratio of 1.1 or $1.10 dollar in assets for every $1 in equity.
However, that’s not really a fair comparison. We expect banks to be able to use that leverage to provide loans to you and me, the business on the corner, the school district and much much more. So, we need to dig a bit deeper and find out what that core equity really is. For JPMorgan it is those same loans they made to you and me, the stock and bond investments of their shareholders, the stocks and bonds they hold and much more – all of which they use to lever up to make more loans and investments. A key then becomes making sure those loans and investments are sound with a very high likelihood of repayment. In the case of Silicon Valley Bank the issue was not so much that the leverage was out of whack or even bad investments as much as it is this accounting rule called “mark to market”.
They bought a bunch of securities in 2020 and 2021 like long-term treasuries and mortgage-backed securities that carried very low interest rates because that was the market at that time. Now, had they held onto those investments to maturity, they would most likely have gotten all their money back and the interest rates promised at the time they made those investments. However, as of last week, if all the folks with deposits at Silicon Valley Bank – some $161.48 Billion worth – showed up asking for their money, a “run on the bank”, they would’ve lost nearly $2 Billion on those same securities creating a shortfall.
Now I have absolutely taken a very complex situation here and plucked a very few facts and figures that do not tell the whole story – just some highlights. What is then a tiny bit of advice: Well, your grandma told you not to put all your eggs in one basket and having your financial eggs in more than one basket seems like a darned good idea.